When it comes to saving for retirement, one of the most popular options is a 401(k) plan. One of the key decisions that individuals need to make when contributing to a 401(k) plan is whether to make Roth or pretax contributions. Both options have their own set of pros and cons, and the decision of which one to choose should be based on an individual’s specific circumstances and retirement goals. Here is a guide to help you make the right choice:
- Understand the difference: Roth contributions are made with after-tax dollars, while pretax contributions are made with pre-tax dollars. This means that Roth contributions are taxed in the year they are made, while pretax contributions are taxed in the year they are withdrawn.
- Tax implications: The main advantage of pretax contributions is that they lower your current tax bill. On the other hand, Roth contributions may result in a higher current tax bill, but the money you withdraw in retirement will be tax-free.
- Retirement age: Another consideration is your age at the time of retirement. If you expect to be in a higher tax bracket when you retire, Roth contributions may be more beneficial. However, if you expect to be in a lower tax bracket when you retire, pretax contributions may be more beneficial.
- Withdrawals: Another factor to consider is the flexibility of withdrawals. With Roth contributions, you can withdraw your contributions (not appreciation) at any time without penalty. With pretax contributions, you will be subject to penalties if you withdraw the money before you reach retirement age.
- Mixing: One option that you may consider is mixing Roth and pretax contributions. This allows you to take advantage of the benefits of both options and diversify your retirement savings.
In conclusion, the decision of whether to make Roth or pretax contributions to a 401(k) plan depends on your personal circumstances and retirement goals. It’s important to consider the tax implications, your age at the time of retirement, the flexibility of withdrawals and the possibility of mixing contributions.
|Presented by the Financial Planning Committee of Lake Street, an SEC Registered Investment Adviser The information contained herein constitutes general information and is not directed to, designed for, or individually tailored to, any particular investor or potential investor. This report is not intended to be a client-specific suitability analysis or recommendation, an offer to participate in any investment, or a recommendation to buy, hold or sell securities. Do not use this report as the sole basis for investment decisions. Do not select an asset class or investment product based on performance alone. Consider all relevant information, including your existing portfolio, investment objectives, risk tolerance, liquidity needs and investment time horizon. Diversification does not ensure a profit or guarantee against a loss. There is no assurance that any investment strategy will be successful. Investing involves risk and you may incur a profit or a loss.|